Hitotsubashi Institute for Advanced Study


Macroeconomic uncertainty matters: A nonlinear effect of financial volatility on real economic activity


A stock market volatility index is a widely-used proxy of uncertainty in the macroeconomy, and its increase is shown to dampen real economic activity. In contrast, the macroeconomic uncertainty index proposed by Jurado et al. (2015) measures the predictability of a wide range of macroeconomic indicators and thus is a comprehensive indicator of macroeconomy-wide uncertainty. This paper empirically investigates a nonlinear link between financial volatility and real economic activity depending on the level of the macroeconomic uncertainty index. Based on the United States and Japan data, empirical analysis suggests that an increase in the financial volatility lowers industrial production and business fixed investment more persistently when the macroeconomic uncertainty is higher.


Report No.: HIAS-E-121
Author(s): Jouchi Nakajima (a)
Affiliation: (a) Hitotsubashi University
Issued Date: June 2022
Keywords:  Financial volatility, Macroeconomic uncertainty, Nonlinear effect.
JEL:  E32, E52.